T.C. M em o . 2 0 1 9 -2 5

UNITED STATES TAX COURT

CHARLES M . STEINER AND RHODA L. STEINER, Pet i t io n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 4 0 75 -1 6
. Fi l edAp ri l 2 , 2 0 1 9
.

St ep hen S. Ph o t o p ou lo s , fo r p et i t i o n ers . J u l i a L. W ah l, fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION
RUW E , J ud g e: Th e Co m m is s i o n er d et erm i n edd efi ci en ci es i n p et i t io n ers ’ Fed eral i nco m e t ax an daccu racy -rel at edp en al t i es u n d er s ect i o n 6 6 62 (a) as fo l l o w s : 1

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al (co n ti n u ed ...)- 2
-

[* 2 ] Pen al ty

Year Defi ci en cy s ec. 6 6 6 2 (a) 2 01 1 $ 1 6 8 ,5 39 $ 3 3 ,7 0 7.8 0 2 01 2 2 2 ,0 7 0 4 ,4 14 .0 0 Aft er co n ces s i o ns b y

res p o n den t , 2 th e i ss u e rem ai n i n g fo r d eci si on i s wh ether p et i t i o n ers ’ y ach tch art er o p erat i o n was an act i v it y “ n o ten g ag ed i n fo r p ro fi t ” wi th i n th e m ean i n g o f s ect i on 1 8 3 fo r t he y ears i n i s s ue. FINDINGS OF FACT So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e at t ach ed ex h i b i ts are i n co rp o rat ed h erei n b y th i s referen ce. Pet i t i o ners are h u s b an d an dwi fe, an d t h ey res i dedi n Fl o ri d a wh en th ey fi led th ei r p et i t i o n . Pet i t i o ner h u s b an d i s a h i g h l y s u cces s fu l b u s i n es s m anan d a cert i fi edp ub l i c
acco u n t an t . In1 9 7 3 h e acq u iredan el ect ri cal s up pl y b u s i nes s . He was th e ch i ef
ex ecu t i v e o ffi cer, an dth e b u s i n es s g rew t o h av e n earl y 1 ,0 0 0 em pl o y ees an d

1 (...co n t in u ed ) Rev enu e Co de i n effect fo r t h e y ears i n i s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.

2 Attri al res p on d en t co n ced edth atp et i ti o n ers d i d n o tu s e th e y ach t fo r p ers o n al p u rp o s es du ri n g th e y ears i n i s s u e an dthatth ei r cl ai m ed d edu ct i o n s are n o tp ro h i b i t edu nd er s ec. 2 8 0 A. Inh i s o p en i n g b ri ef res p o n d en tco n ced edth at p et i t i o n ers are n otl i ab l e fo r t h e s ec. 6 6 6 2 (a) accu racy -rel at edp en al ty fo r ei th er y ear i n i s s u e.- 3
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[* 3 ] s ev eral h u n dredm i l l i o n d o l l ars o f rev en u e. Pet i t i on er h us b an dacq u i redo t h er
co m p an i es i n cl u d i n g a co m

m u n i cat i o n s co m

p an y an da t el ep h on e reco v ery
co m p an y . Pet i t i o ners h av e b een b o at i n g s i n ce t h e 1 9 70 s an dh av e o wn eds ev eral b oat s
o v er t h e y ears . In2 0 0 1 p et i t io n ers p u rch as edth e Tri u m p han tLady , a 1 5 5 -fo o t
m o to r y ach t , fo r $ 4 , 6 5 0 , 0 0 0
. 3 Th ey u s edi tfo r d i vi n g , an dth ey p l an nedt o s ai l
aro u n dth e wo rl d. Th e Tri u m p h an tLady

h ada fu l l -t im e cap t ai n an dcrew. In 2 0 0 6 p et i t i o n ers u n d ert o o ka $ 1 0 ,8 3 9 ,0 0 0 refi to f t h e Tri u m ph an t Lady

th atwas
co m p l et edi n 2 0 0 9 . In2 0 0 8 p et i t i o ners h i redCap t ai n Bry an Pri d g eo n t o co m p l et e th e refi tan d p i l o t th e Tri u m p h an tLady . Un t i l 2 0 0 9 p et i t io n ers u s edth e Tri u m p h an tLady

ex cl u s i v el y fo r p ers o n al p u rp os es . Th i s ch an g edi n 2 0 0 9 aft er J o h n W el l er, a y ach tb ro k er, ap p ro ach ed th em ab ou tm ak in g th e Tri u m

p h an tLady

av ai l ab l e fo r a s p eci fi c ch art er. Pet i t io n ers ret ai n edIn tern at i o n al Yach tCo l l ect i o n (IYC) as th e ex cl u si ve ag en tt o ch art er t h e Tri um

ph an tLady

an ds ecu reda ch art er t h ro u g h M r. W el l er’ s co n t act fro m M ay 2 -1 0 , 2 0 09
. 4

3 Pet i t i on ers o wn edth e Tri u m p h an tLady thro u g h Tri l ady M ari ne, Lt d ., a Caym an Is l an d s co m

p an y fo rm edb y

p et i t io n er h u s b an di n 2 0 0 1
. 4 Pet i t i on ers co n du ct edthe ch art er act i v i ty th ro ug h CM Ch art er, LLC.

(co n ti n u ed ...)- 4
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[* 4 ] Aft er t h e ch art er p et i t i o n ers co nt i nu edt o u s e t h e Tri u m p han tLady

fo r p ers o n al p u rp o s es u n t il 2 0 10
. Th ey d eci d edt o s el l th e y ach tb ecau s e o f p et i t i o n er h u s b an d ’ s d ecl i n i n g m o b i l i ty an dth ei r fi n an ci al co n cern s . Atthe s am e t i m e t h ey h el di t o u tfo r ch art er. Pet i ti o n ers l i s t edth e Tri u m ph an t Lady

fo r s al e wi th an
as k i n g p ri ce o f $ 1 5 .9 5 m i ll io n , an di ts o ldi n J an u ary 2 0 12 fo r $ 4,4 5 5 ,0 0 0. Pet i t io n ers d i dn o tex p ectth e y ach t t o ap p reci at e i n v al u e. Pet i t i o ner h u s b an d m an ag edthe ch art er act i v i ty . He was aware o f t h e 2 0 0 8
eco n om i c d o wn tu rn b efo re t h ey l i s t edth e y ach tfo r ch art er, an dIYC i n fo rm ed p et i t i o n ers o f t h e d o wn turn ’ s effect o n the ch art er i n du s try . Pet i t i o ners d i dn o t h av e a fo rm al b u si n es s p l an . Th ere i s n o ev i den ce t h atp et i t i o ners co n s u l t ed ch art er i n du st ry

ex p ert s ab o u tth e p ro fi tp ot en t i al o th er t h an ch art er b ro k erag e
co m p an i es th atwo u l d earn a co m m i ss i o n up o n ch art er. Th e Tri u m

ph an tLady was l i s t edfo r ch art er wi th t wo y ach tb ro k ers . 5 Pet i t io n ers ad v ert i s edth e Tri u m p h an tLady

i n y ach t m ag azi n es an db ro ch u res , o n t el ev is i o n an dth e i n tern et , an datb o ats h ows . Bet ween 2 01 0 an d2 01 2 p et i t i o n ers

4 (...co n t in u ed ) Pet i t io n er h u s b an d ap p ears t o h av e b een th e s ol e m em ber.
5 Th e y ach twas l i s t edwi th IYC fro m 2 00 9 u n ti l Au g u s t2 0 1 0, Al l i ed Ch art ers fro m

Au g us t2 0 1 0 u n t i l M arch 2 01 1 , an dth en ag ai n wi th IYC fro m M arch 2 0 1 1 u nt il th e y ach twas s o l d
.- 5
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[* 5 ] s ecu red o n l y o n e ch art er fo r t h e Tri u m p h an tLady , a week -l o ng ch art er fo r $ 1 5 0 ,0 0 0 . Th e ch art er act i v i ty n ev er p ro du ced a p ro fi t . Th e Tri u m

ph an tLady was d o ck edi n Fo rtLau d erd al e wh i l e i twas av ai l ab l e fo r ch art er. 6 Ex cep t fo r t h e o n e ch art er, th e Tri u m ph an t Lady

rarel y l eftth e d o ck b u ts t i ll m ai n t ai n ed a fu l l -t i m e crew t o k eep th e v es s el s eawo rt h y . Th e Tri u m ph an tLady i n cu rreds ub s t an t i al m o n th l y ex p en ses , wh i ch are refl ect ed th ro u g h b o o k s an d reco rd s . Th es e i ncl u d ed crew wag es o f m o re t h an $ 2 5 ,0 0 0 p er
m o nt h i n 2 0 1 1 , 7 a $ 1 0 ,0 0 0 p er-m o n th d o ck in g fee i n 2 0 1 1 an d 2 0 1 2 , ap p ro x i m at el y $ 1 ,4 0 0 i n u t il i t i es p er m o n th i n 2 0 1 1 an d2 0 1 2 , an dm o n th l y
m an ag em en tfees t o h an d l e p ayro l l an dm ari t i m e reg u l at o ry co m p l i an ce t h at
ran g ed fro m

$ 1 ,5 0 0 t o $ 2 , 0 0 0 p er m o n th
. Pet i t i o ners m ai n t ai neda b an k acco u n t ex cl us i v el y fo r t he ch art er act i v i ty b u tp ai dm o s to f the ex p en s es fro m p ers o n al acco u n t s . Cap t ai n Pri d g eo n an do t h er
crew m em

b ers were au th o ri zedt o u s e p et i t i o ner h u s b an d ’ s p ers o n al cred i tcard s fo r s o m e y ach t -rel at ed ex p en s es b u tn eed edh i s p erm i s s i o n fo r an y ch arg es o v er

6 Un t i l 2 0 1 0 th e Tri u m

p h an tLady

was b as edo u t s i d e t he Un i t edSt at es . 7 Th e reco rdd o es n o t co n t ai n cl ear i nfo rm at i o n ab ou tth e wag e ex pen s es fo r th e crew fo r 2 0 1 0 an d 2 0 12
.- 6
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[* 6 ] $ 1 ,0 0 0. Pet i ti o n ers p ai dth e cred i tcardb i l l s ex cl u s i v el y fro m p ers o n al b an k
acco u n t s. Fro m 2 00 9 u n ti l th e Tri u m

p h an tLady

was s o l di n 2 0 12 , Cap tai n Pri d g eo n h an dl ed th e d ay -t o -d ay

o p erat i o n s . Pet i t io n er h u sb an dan d Cap t ai n Pri d g eo n reg u l arl y co m m u n i cat ed v i a em ai l, an d p et i t io n er h u s b an dv i s i t edthe Tri u m p h an t Lady ap pro x i m at el y

ev ery two t o th ree m o n th s . Pet i t i o ners fi l edjo i n tFed eral i n co m e t ax retu rn s . Th ey rep o rt edth e i n co m e
an d d edu ct i o n s fro m

the ch art er act i v i ty

o n th ei r Sch edu les C, Pro fi to r Lo s s Fro m Bu s i nes s, an dcl ai m ed a l os s d edu ct i o n each y ear. Pet i t i o ners m ad e s ev eral
n o t ewo rt h y

d eci s i o n s wi th res p ectt o th ei r retu rn s . Fo r 2 0 1 0 p et i t i o n ers cl ai m ed
o n l y $ 3 0 o f ch art er act i v i ty

d edu ct i o n s . Pet it i on ers d i dn o tcl ai m d ep reci at i o n d educt i o n s fo r t he co sto f t h e y ach t wh i l e i t was h el do u tfo r ch art er al th o u g h th ei r
acco u n t an t s d et erm i n edth ey were en t i t l edt o a $ 6 35 ,3 6 3 d edu ct i on fo r 2 0 1 1
. Fo r 2 0 1 1 an d2 01 2 p et it i o n ers rep o rt edth e ch art er act i v i ty ’ s g ro s s i n co m e b efo re ex p en s es , t o t al ex p en ses , an dn et l o s s es as fo l l o ws :- 7
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[* 7 ] Gro s s i n co m e Year b efo re ex p en s es Ex p en s es (Netl o s s) 2 0 1 1 1 $ 5 1 , 6 2 0 $ 7 57 ,0 2 6 ($ 7 0 5 ,4 06 ) 2 0 1 2 -0
- 1 2 2 ,4 2 0 (1 22 ,4 2 0 )
1 Pet i t i on ers rep o rt edg ro s s recei p t s o f $ 1 6 4,6 9 0 an d th ey rep o rt ed co s to f g o o d s s o l do f $ 1 1 3 ,0 7 0
. Pet i t io n ers u s edth es e l o s s es t o o ffs ets i g n i fi can tn on -ch art er-act i v i ty i n co m e. Aft er acco u n t i n g fo r t h e n etl o ss es , p et i t i o n ers h adi n co m e o f $ 5 ,4 7 8 ,2 2 0 an d $ 1 0 ,9 4 6 ,5 6 1 fo r 2 0 1 1 an d2 0 1 2 , res pect i v el y . OnM arch 2 4 , 2 0 1 6 , th e Co m m i s s i o n er i s s u edp et i t i o n ers a n ot i ce o f d efi ci en cy , i n wh i ch h e d et erm i n edth atthe ch art er act i v i ty was n o t o p erat edfo r p ro fi t. Fo r 2 0 11 th e Co m m i ss io n er d i s al l o wedm o s to f t h e n etl o s s d edu ct i o n b u t al l o wed a d educt i o n t o th e ex t en to f t h e $ 1 6 4,6 9 0 d eri v edfro m th e ch art er act i vi ty . Fo r 2 01 2 h e d i sal lo w edth e en t i re n etl o s s d edu ct i o n . Pet i ti o n ers t i m el y fi led a p et i ti o n wi th th is Co u rt . OPINION Th e Co m m is s i o n er’ s d et erm i n at i o n s i n a n o t i ce o f d efi ci en cy are g en eral l y p res u m edco rrect , an dth e t ax p ay er b ears th e b urd en o f p ro v i n g t h atth ey are i n co rrect . Ru l e 1 4 2 (a); W el ch v . Hel v eri ng , 2 90 U.S. 1 1 1, 1 1 5 (1 9 3 3). Th e- 8
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[* 8 ] ev i d en ce d o es n otes t ab li s h th atth e b u rd en o f p ro o f s h i ft s t o res p o n den t
u n d er s ect i o n 7 4 9 1 (a) as t o an y i s s u e o f fact
. A t ax p ay er m ay

n o tfu l l y d edu ct ex pen s es reg ard i n g an act i v i ty u n der
s ect i on 1 6 2 o r 2 1 2 i f t h e act i vi ty i s n o t en gag edi n fo r p ro fi t . Sec. 1 8 3 (a), (c); s ee al s o Kean i n i v . Co m

m i s s io ner, 9 4 T.C. 4 1 , 4 5 (1 9 9 0 ). Pu rs u an tt o s ect io n 1 8 3 (a), i f an act i v i ty

i s n o ten g ag edi n fo r p ro fi t , n o d educt i o n at tri b ut ab l e t o th atact i v i t y i s al l o wedex cep tt o th e ex t en tp ro v i d edb y s ect i o n 1 8 3 (b ). In rel ev an tp art , s ect i on 1 8 3 (b ) al l o ws d edu ct i o n s th atwo u l dh av e b een al l o wab l e h adth e act i v i ty b een en g ag edi n fo r p ro fi tb u to n l y t o th e ex t en to f g ro s s i nco m e d eri v edfro m th e act i vi ty (redu cedb y

d edu ct i o n s at tri b u t ab l e t o t h e act i v i ty thatare al l o w ab l e wi th o u treg ardt o wh et h er th e act i v i ty was en g ag edi n fo r p ro fi t ). Sect i o n 1 8 3 (c) d efi n es an act i v i ty

n o ten g ag edi n fo r p ro fi tas “ an y act iv i ty o th er t han o n e wi t h
res p ectt o wh i ch d educt i o n s are al l o wab l e fo r t h e t ax ab l e y ear u n d er s ect io n 1 6 2 o r
u n d er p arag rap h (1 ) o r (2 ) o f s ect i o n 2 1 2.” Dedu ct i o n s are al l o wed u n d er s ect io n 1 6 2 fo r th e o rd i n ary an d n eces s ary
ex p en s es o f carry i n g o n an act i v i ty wh i ch co n s t i tu t es th e t ax p ay er’ s trad e o r b u s i n es s . Dedu ct io n s are al l o wedu n d er s ect io n 2 1 2 fo r ex p en s es p ai d o r i n cu rred i n co n nect i o n wi th an act iv i ty en g ag edi n fo r t he p ro du ct i o n o r co l lect io n o f i n co m e o r fo r t h e m an ag em en t, co ns erv at i o n , o r m ai n t en an ce o f p ro p ert y h el dfo r- 9
-

[* 9 ] th e p ro du ct io n o f i n co m e. W i th res p ect t o ei th er s ect i o n, the t ax p ay er m u s t d em o n s trat e a p ro fi to b

ject i v e fo r t h e act i v i t ies i n o rd er t o d eductas s o ci at ed
ex p en s es . J as i o n ows k i v . Co m m i s s i o n er, 6 6 T.C. 3 12 , 3 2 0 -3 2 2 (1 9 7 6); Co l l i n s v . Co m m i s s i o n er, T.C. M em o . 2 0 1 1 -3 7 , 2 0 1 1 Tax Ct . M em o LEXIS 3 1 , at* 7 -* 8 ;
s ec. 1 .1 8 3-2 (a), In co m e Tax Reg s . Th e p ro fi ts t an d ardap p l icab l e t o s ect io n 2 1 2 i s th e s am e as thatu sed i n s ect i o n 1 6 2 . See An t o n i d es v . Co m m i s s i o n er, 8 9 3 F.2 d 6 5 6 , 6 5 9 (4 th Ci r. 1 9 9 0 ), aff’ g 9 1 T.C. 6 8 6 (1 9 8 8 ); Al l en v . Co m m i s s i on er, 7 2 T.C. 2 8 , 3 3 (1 97 9 ). Th e Sup rem e Co u rth as h el d t h atfo r d edu ct io n s t o b e al l o wab le u n d er s ect i o n 1 6 2, the “ pri m ary p u rp o s e” fo r en g ag i n g i n th e act i v i ty
m u stb e fo r p ro fi t . An t o n i d es v . Co m m i s s i o n er, 8 9 3 F.2 dat6 5 9 (ci t i n g Co m m i s s i o n er v . Gro et zi n g er, 4 8 0 U.S. 2 3 , 3 5 (1 9 8 7 )); s ee al s o Fi l io s v . Co m m i s s i o n er, 2 2 4 F.3 d1 6 , 2 1 (1 s tCi r. 2 0 0 0 ), aff’ g T.C. M em o . 1 9 9 9-9 2 ; W es tb ro o kv . Co m

m is s i o n er, 6 8 F.3 d8 6 8 , 8 7 5 (5 th Ci r. 1 99 5 ), aff’ g T.C. M em o . 1 9 9 3 -6 3 4
. Wh et h er t he req u iredp ro fi to b ject iv e ex i s t s i s t o b e d et erm i n edo n the b as i s
o f al l th e fact s an d ci rcu m s t an ces o f each cas e. Go l an ty v . Co m m i s s io ner, 7 2 T.C. 4 1 1 , 4 2 6 (1 9 7 9), aff’ dwi th ou tp ub l i s h edo p in i o n , 6 4 7 F.2 d1 7 0 (9 th Ci r. 1 9 8 1 ); Em b ro i d ery Ex p res s , LLC v . Co m

m i ss i o ner, T.C. M em o. 2 0 16 -1 3 6 , at* 2 8 ; s ec. 1 .1 83 -2 (a), In co m e Tax Reg s . W e g i v e g reat er wei g h tt o o b j ect i ve fact s th an t o- 1 0 -

[* 1 0 ] th e t ax pay er’ s s t at em en to f i n t en t . See s ec. 1 .1 8 3 -2 (a), In co m e Tax Reg s .;
s ee al so Keat i ng v . Co m

m i ss i o n er, 5 4 4 F.3 d9 0 0 , 9 0 4 (8 th Ci r. 2 00 8 ), aff’ g T.C. M em o. 2 0 0 7 -3 0 9
. Ev i d en ce fro m y ears b efo re th e y ears i n i ss u e i s rel ev an tt o th e
ex t en ti tcreat es i n feren ces reg ard i n g th e t ax p ay er’ s req u i s i t e p ro fi to b j ect i v e i n l at er y ears . See s ec. 6 2 1 4 (b ); Po u em i v . Co m m i s s io n er, T.C. M em o . 2 0 1 5 -1 6 1 , at
* 4 n .3 , aff’ d , 6 3 3 F. Ap p’ x 1 86 (4 th Ci r 2 0 1 6 ). Sect io n 1 .1 8 3 -2 (b ), In co m e Tax Reg s ., p ro v id es a n o n ex h au s t i v e l i s to f n i n e fact ors u s ed t o d et erm in e wh et her an act i v i ty i s en g ag edi n fo r p ro fi t : (1 ) wh et h er th e t ax p ay er carri es o n th e act i v i ty i n a b u s i n es sl i k e m an n er; (2 ) t he ex p ert i s e o f th e t ax p ay er o r h i s o r h er ad v i s o rs ; (3 ) t h e t i m e an d effo rtex p en dedb y th e t ax p ay er i n carry i n g o n th e act i v i ty ; (4 ) t he ex p ect at i o n th atthe as s et s u s edi n th e act i vi ty m ay ap p reci at e i n v al u e; (5 ) t h e s u cces s o f t he t ax p ay er i n carry i ng o n
o th er s i m i l ar o r d i s s i m il ar act i vi t i es ; (6 ) th e t ax p ay er’ s h i s t o ry o f i n co m e o r l o s s es wi th res p ect t o th e act i v i ty ; (7 ) t h e am o u n to f o ccas i o n al p ro fi t s , i f an y , wh i ch are
earn ed ; (8 ) t h e t ax p ay er’ s fi n an ci al s t atu s ; an d(9 ) el em en t s o f p ers o n al p l eas u re o r recreat i o n . Al l fact s an dci rcu m s t an ces are t o b e t ak en i n to acco u n t, an dn o s i n g l e fact or i s d et erm i n at i v e. Id .; s ee al s o Keat i n g v . Co m m i s s io ner, 5 4 4 F.3 dat9 0 4
. W e wi l l co n s i d er each o f th es e fact o rs i n tu rn .- 1 1 -

[* 1 1 ] 1 . Bu s i n es s l ik e M an n er Th e reg u l at i o n s p ro v i d e t h atcarry i n g o n an act i v i ty i n a b u s i n es sl ik e
m an n er m ay i n d i cat e a p ro fi t o b ject iv e. Sec. 1 .1 8 3-2 (b )(1 ), In co m e Tax Reg s . Th e reg u lat i on s ex p l ai n th atb u s i nes s l i k e o p erat i on s ty p i cal ly i n vo l v e t h e
m ai n t en an ce o f co m

p l et e an daccu rat e b o o k s an dreco rd s , th e co n du cto f t h e act i vi ty i n a m an n er s i m i l ar t o th ato f a p ro fi t ab l e en t erp ri s e, an d ch an g es t o i m p ro v e o p erat i on s an d p ro fi t ab i l i ty . Id . Our cas el aw h as al s o l o ok edt o fact o rs
s u ch as p rep arat i on o f a b u s i n es s p l an , a co ns i s t en t an d co n cen trat ed ad v ert i s i n g p ro g ram , an d co m

m i n gl in g o f p ers o n al an d b u s i n es s fu n d s. Hy l t o n v . Co m m i s s i o n er, T.C. M em o . 2 0 1 6 -2 3 4 , at* 2 3 , aff’ d , 7 2 1 F. Ap p’ x 3 0 0 (4 th Ci r. 2 0 1 8 ); Do d d s v . Co m

m i s si o n er, T.C. M em o . 2 0 1 3 -7 6 , at * 1 3 , * 1 5
. So m e as p ect s o f t h e ch art er act i v i ty d i s p l ay a b u si n es s l i k e m an ner, s u ch as
m ai n t en an ce o f b oo k s an dreco rd s an du se o f a p ayro l l p ro v i d er. Ho wev er, t h es e b u s i n es s l i k e t rai t s are n ot en ou g h t o o v erco m e th e s ho rt co m i ng s . Pet i t i o n ers d i d
n o th av e a fo rm al b u s i n es s p l an . In s t ead , th ey s eem t o h av e en t eredth e ch art er act i vi ty b ecau s e o f t h e eas e o f o b t ai n i ng th ei r fi rs t ch art er i n 2 0 0 9
. Al th o u g h p et i t i o n ers h ada b u s in es s b an kacco u ntfo r t he ch art er act i vi ty , th ey p ai d m o s to f th e ex p en s es fro m

p ers o n al acco u n ts . Fi n al l y , p et i t i o n ers ’ t ax rep o rt i n g was n o t b u s i n es s l i k e. Pet it i o n ers d i s p u t e t h i s . Th ey co nt en dthatth ey d i dn o td edu ct- 1 2 -

[* 1 2 ] $ 6 3 5 ,3 63 o f d ep reci at i on fo r 2 01 1 th atthei r acco u n t an ts ad v i s edth ey were
en t i t l edt o b ecau s e t h ere wo u l db e recap tu re up o n s al e. Ho wev er, fo r 2 0 10 p et i t i o n ers d edu ct ed o n l y $ 3 0 o f ch art er-rel at edex p en s es al th o ug h th e act i v i ty i n cu rreds i g ni fi can tex p en s es . Th i s fact o r fav o rs res p o nd en t . 2 . Ex p ert i s e o f Tax p ay er o r Ad v i s ers A t ax p ay er’ s o wnex pert i s e, res earch , an ds tu dy o f an act iv i ty , an d
co n su l t at i o n wi th ex p ert s m ay i n d i cat e a p ro fi tm ot i v e. Sec. 1 .1 8 3 -2 (b )(2 ), In co m e Tax Reg s . Ho w ev er, t he t ax p ay er’ s rel i an ce o n th e ad v i ce o f an i n t eres t edp art y
m ay b e u n reas o n ab le. M ag as s y v . Co m m is si o n er, T.C. M em o . 2 0 0 4-4 , 2 0 0 4 Tax Ct . M em o LEXIS 2 , at* 2 6 , aff’ d , 1 4 0 F. Ap p ’ x 4 5 0 (4 th Ci r. 2 0 0 5 ); s ee J o h n s o n
v . Co m m i s s i o n er, T.C. M em o . 1 9 9 2 -3 5 8 , 1 9 9 2 Tax Ct
. M em o LEXIS 3 7 7 , at* 1 4
. Wh i l e p et i t i o n er h u s b an do wn eda y ach t , h e d i dn oth av e ex pert i se i n th e ch art er b us i n es s . Hi s res earch ap p ears t o h av e m ai nl y i n v o l v edco n s u l ti n g wi th ch art er co m

p an i es . Th es e co m

p an i es p o t en t i al l y

s t o o dt o p ro fi ti f p et i t i o ner
en t eredth e ch art er b u s i n es s, an dth erefo re h i s rel i an ce was u n reas o n ab l e. Th i s fact or fav o rs res p o n den t . 3 . Ti m e an dEffo rt A t ax p ay er’ s co n tri b u t i o n o f s i g n i fi can tt i m e an deffo rtm ay i n d icat e a p ro fi t
m o ti v e. Sec. 1 .1 8 3 -2 (b )(3 ), In co m e Tax Reg s . Ho wev er, “ [t ] he fact th atth e- 1 3 -

[* 1 3 ] t ax p ay er d ev o t es a l i m i t edam o u nto f t i m e t o an act iv it y d o es n o tn eces s ari l y i n d i cat e a l acko f p ro fi tm ot i v e wh ere t h e t ax p ay er em p l o y s co m

p et en tan d qu al i fi edp ers o n s t o carryo n s uch act i v i ty .” Id
. It is u n cl ear p reci sel y

h o w m u ch t i m e p et i t i o n er h us b an dd ev o t ed t o th e ch art er act i v it y , b u th e reg u l arl y co m m u n i cat edab o u ti twi th Cap tai n Pri d g eo n . He em p l o y edCap t ai n Pri d g eo n , a co m p et en t an dqual i fi edcap t ai n , t o h an dl e t h e d ay -t o -d ay

o p erat i o n s . Bu t th es e o p erat io n s were al s o n eces s ary t o m ai n t ai n th e y ach tfo r s al e. Th i s fact o r i s n eu tral
. 4 . Ex p ect at i o n o f As s etAp p reci at i o n Pet i t i o ners d i dn o tex p ectth e Tri u m ph an t Lady

t o ap p reci at e i n v al u e. Th i s fact or fav o rs res p o n den t . 5 . Su cces s i n Si m i l ar o r Di s s i m i l ar Act i v i ti es Al th ou g h an act iv i ty

i s u np ro fi t ab l e, t h e factth atthe t ax p ay er h as p rev i o u s l y en g ag edi n s i m i l ar o r d i s s i m i l ar act iv i t i es an dco nv ert edth em fro m
u np ro fi t ab l e t o p ro fi t ab l e m ay i n d i cat e t h atth e cu rren tact i vi ty i s co n du ct edfo r p ro fi t. Sec. 1 .1 8 3 -2 (b )(5 ), In co m e Tax Reg s . Pet i t i o ners co n t en dth atp et i ti o n er h u s b an d’ s s u cces s fu l b u s in es s career i n d i cat es a p ro fi t m o t i ve. W e d i s ag ree. Ou r cas el aw h as h el d t h ata t ax p ay er’ s p as ts u cces s i s n o ti n d i cat i v e o f a p ro fi t m o ti v e wh en h e d o es n o tu s e h is b u s i n es s- 1 4 -

[* 1 4 ] ex pert is e i n an act i v i ty . Gi l es v . Co m m i ss i o ner, T.C. M em o. 2 0 05 -2 8 , 2 0 0 5 Tax Ct . M em o LEXIS 2 9 , at* 53 ; Do d g e v . Co m m i s s i o n er, T.C. M em o . 1 9 9 8 -8 9 , 1 9 9 8 Tax Ct . M em o LEXIS 8 9 , at* 1 8 , aff’ d wi th ou tp ub l i s h edo p i n i o n , 1 8 8 F.3 d 5 0 7 (6 th Ci r. 1 9 99 ). Bes i d es d el eg at in g t as ks t o Cap t ai n Pri dg eo n , p et i t i o n ers h av e n o ts h o wnth atp et i t i o n er h u s ban du s ed an y o f h is p rev i o us l y acq u i red b u s i n es s ex p ert i s e i n th e ch art er o p erat i o n. Th i s i s b o ls t ered b y p et i ti o n er h u s b an d ’ s fai l u re t o co n du ctth e ch art er act iv i ty i n a b u s i n es s l i k e m an n er. 6 . Hi st o ry

o f In co m e/ Lo s s es an dAm o un to f Occas i o n al Pro fi t s Th e ch art er act i v i ty

was u np ro fi tab l e each y ear o f i t s o p erat i o n . Pet i t i o n ers at tri b u t e t h i s t o th e 2 0 08 eco no m i c d o wn tu rn . Bu tp et i ti o n ers were aware o f t h e
m ark etco n d i ti o n s wh en th ey en t eredth e ch art er act i v i ty , an dth ey were i nfo rm ed
o f t h e effect th i s h ado n th e ch art er i n du st ry . Th erefo re, t h i s fact o r fav o rs
res p o n d en t. 7 . Fi n an ci al St atu s o f t he Tax p ay er Sub s t an t i al i n co m e fro m

s o u rces o ther t han th e act i v i ty (p art icu l arl y

i f t h e l o s s es fro m

th e act i v i ty

g en erat e s ub s t an t i al t ax b en efi t s ) m ay i nd i cat e t h atth e act i vi ty i s n o t en g ag edi n fo r p ro fi t. Sec. 1 .1 8 3 -2 (b )(8 ), In co m e Tax Reg s . Duri n g th e y ears i n i s s u e p et it io n ers h ads ig n i fi can ti n co m e. Pet it i on ers cl ai m eds i zab l e- 1 5 -

[* 1 5 ] t ax b en efi ts fro m

th e l o s s es g en erat ed b y

th e ch art er act i vi ty . Th i s fact o r fav o rs res p o nd en t. 8 . Pers o nal Pl eas ure o r Recreat i o n Al th ou g h p et i t i o n ers en

jo y edb o at i n g fo r a s i g n i fi can t n u m b er o f y ears , th ere i s n o i n d i cat io n thatthey d eri v edrecreat i o n o r p l eas ure fro m th e ch art er act i vi ty . Th i s fact o r fav o rs p et i t i o n ers . On l y o n e o f t h e ab o v e fact o rs p o i n t s i n p et it i on ers ’ fav o r. Th e wei g h to f t h e
ev i d en ce d o es n ots h o w thatp et i t i o n ers o p erat edth e ch art er act i v i ty wi th a p ro fi t
o b ject i ve wi th in th e m ean in g o f s ect i o n 1 8 3(c). Rat h er, i t ap pears thatp et i t i o n ers ’ p ri m ary o b ject i v e was t o p art i al l y o ffs et th e s i g n i fi can tfi xedco st s o f m ai n t ai n i n g th e y ach ts o th ati t co u l db e s o ldaft er t h ey s t o p ped u s i ng i tfo r p ers o n al p u rp o s es . An dp et i t i o n ers ’ o b

ject i v e was t o o ffs etthei r s i g n ifi can ti n co m e wi th t h es e fi x ed
co s t s . In reach i n g o u r d eci s i o n , we h av e co n s id eredal l arg u m en t s m ad e b y th e p art i es , an dt o th e ex ten tn o tm en t i o n edo r ad dres s ed , th ey are i rrel ev an to r wi th o u tm eri t .- 1 6 -

[* 1 6 ] To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r
res p o nd en t as t o the d efi ci en ci es an dfo r p et i t i o ners as t o th e accu racy -rel at ed p en al ti es u n d er s ect i o n 6 6 6 2 (a).